Groupon rivals adjust strategies to survive in daily deals market

Nearly four years after Groupon introduced the concept, smaller rivals that had sought to replicate the Chicago giant's early, explosive success are making tweaks to take advantage of lessons learned — sometimes painfully.

"There was a large amount of exuberance for the first couple of years in the industry, and now players — both on the daily deals side and on the merchant end — have gotten very sophisticated about what works and what doesn't," said Jim Moran, co-founder of Yipit, a deals aggregator that also tracks sector data. "That's why the industry continues to show modest growth."

Advertising and media research firm BIA/Kelsey projected recently that U.S. consumer spending on online deals would reach $3.6 billion in 2012, doubling last year's figure of $1.8 billion. By 2016, spending is forecast to hit $5.5 billion, though year-on-year growth rates will have slowed to single digits.

Of course, Groupon continues to dominate the field, accounting for more than half of the daily deals market in North America, according to Yipit. Its premise is a simple one: Sell vouchers for discounted products or services and split the proceeds with the merchant.

Smaller companies have used Groupon's model to carve out comfortable existences in specific geographies or niche categories. Chicago start-up FamilyFINDS, for example, targets moms with deals on family-friendly activities and products.

The 2-year-old company's deals were initially structured like Groupon offers: Pay $20 for a $40 box of organic fruits and vegetables delivered to your doorstep, for example. The problems founder and Chief Executive Lindsay Cohen said she encountered were threefold: The cost of acquiring customers, mostly through online advertising, was getting too high. The company had difficulty sourcing high-quality deals as local merchants, burned by poor experiences running offers, became disenchanted with the model. Cohen also noticed that her members were getting overwhelmed by emails peddling similar deals, resulting in slower redemption rates.

Last month, FamilyFINDS switched to a subscription model in which members pay $12 a year to access deals. They can claim vouchers for free and pay only if they end up making a purchase at the merchant.

Cohen described the change as "80% differentiation from the traditional daily deal space" without departing entirely from the industry, where she continues to see growth opportunities. She plans to expand from two cities, Chicago and Los Angeles, to 20 markets by the end of the first quarter of 2013.

Other daily deal entrepreneurs found room on Groupon's coattails while avoiding direct competition with the onslaught of copycats.

Kris Petersen founded Chicago-based DealsGoRound two years ago as a Craigslist-style marketplace to match buyers and sellers of unused, non-expired vouchers. He raised $300,000 in funding from Lightbank, the venture capital firm run by early financial backers of Groupon.

Despite the promising start, "I was never under the impression that the pace of the industry was going to keep up," Petersen said. "You knew things would slow down a bit, that we couldn't possibly support 20 new daily deals companies a week launching."

Yipit's Moran said his firm has tracked more than 800 daily deal sites since 2009. In the last month, Yipit counts 227 that are still publishing new offers. Petersen saw a slowdown in his own voucher-reselling business. In response, he relaunched DealsGoRound last month as MyCabbage, a service for consumers to share and store coupons, gift cards and cash equivalents in addition to daily deal vouchers. The revamped company raised an additional $950,000 from investors and migrated a couple hundred thousand members to MyCabbage.

"The novelty has worn off, so who's left is the people who have really found value in [online deals]," Petersen said. "The users are not out there buying these extravagant deals or things they couldn't otherwise afford. They're buying things for their daily life."

Groupon itself has evolved far beyond offering coupons for discounted restaurant meals and manicures. The company, which aspires to be the Amazon of local commerce, now provides deals on travel getaways and physical products. It has also rolled out technology tools for merchants to help them manage customer traffic, run loyalty programs and process credit card payments via mobile devices.

"It's not that the [traditional] local deals portion is going to be obsolete," said Mark Fratrik, chief economist at BIA/Kelsey. "It's just that for these companies to grow any further, they have to move into other related types of services."